PORTER'S 5 FORCES
A business model for assessing competitive intensity
Michael Porter published an article in the Harvard Business Review in 1979 entitled How Competitive Forces Shape Strategy. There has been the inevitable analysis and criticism of the model since then but its wide use and appeal is testimony to the significant contribution it has made to strategic thinking. In particular, the five forces are those that influence the profit structure of an industry as they determine how the economic value is apportioned. It can be drained away by any of the forces – rivalry between competitors, the power of suppliers, the power of customers, new entrants and substitutes.
The five forces (rivalry, power of suppliers, power of customers, new entrants, substitutes) are not macro factors such as those described in the PEST model (political, economic, social and technological), rather they are micro-factors much closer to a business. The forces are likely to have an immediate effect on the company and influence its ability to serve its customers and make a profit.
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Industry rivalry: The central force, the one that is usually in the face of every business, is the rivalry that exists with other competitors in the market.
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Suppliers: Large and monopolistic suppliers can have a huge influence on competitiveness.
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Threat of substitutes: A company’s competitive position can be weakened by substitutes.
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Threat of new entrants: The cosy position enjoyed by suppliers to a market can be disrupted by new players.
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Bargaining power of buyers: In some markets there are a limited number of large buyers who can dictate prices and terms.
Porter referred to the threat of substitutes, the threat of established rivals and the threat of new entrants as “horizontal” competition. The bargaining power of suppliers and the bargaining power of customers he considered to be “vertical” competition.
The Five Forces model will not, on its own, point to a strategy. The model will show the weight of influence of each micro-force that surrounds the company. It may be helpful to also carry out a PEST analysis and understand the higher level forces before examining the five forces. Armed with this understanding of what is shaping the business, a SWOT would complete the strategic overhaul.
Competition is a threat but it can usually be managed. Use the 5 forces to work out where the main threat comes from so that it can be minimised.
Consider also carrying out a PEST analysis which will take account of the macro factors shaping your business.